Conditions precedent and the ‘deemed fulfilment’ doctrine

Certainly, 2024 is poised to generate some significant legal developments. However, one of the courts’ last acts of 2023 should not go unacknowledged.

Namely, the High Court has clarified that there is no doctrine of ‘deemed fulfilment’ of conditions precedent when a defendant has breached a contract. We discuss King Crude Carriers SA v Ridgebury November LLC [1] in this article.

Facts

The sellers (one of which was King Crude Carriers SA) entered into a contract with the buyers (one of which was Ridgebury November LLC), for the sale and purchase of a fleet of ships (the “Contract”). The buyers were to also enter into agreements with management companies for each vessel’s maintenance.

To properly fulfil its contractual obligations, Clause 2 of the Contract required the buyers to pay a deposit which equated to 10% of the purchase price (the “Deposit”), which would be held in escrow until completion. Payment of the Deposit, therefore, was a condition precedent to the buyers’ ownership of the vessels.

Clause 21 provided a broadly-worded mechanism to ensure the Contract could survive any commercial difficulties encountered by the buyers in fulfilling any conditions precedent as a result of the Covid-19 pandemic, which read:

“In the event that the Buyers, acting reasonably in good faith, are unable to enter into Management Agreements with the Vessels’ Managers by the time of the Sellers tendering Notice of Readiness, then the Parties shall cooperate and make best endeavours to find a solution so that the Buyers are not in default and the Vessels can be delivered as promptly as possible.”

Notwithstanding Clause 21, the Contract still entitled the sellers to terminate the Contract where the Deposit was not properly paid, in addition to compensation from the buyers for associated losses. It should be noted that the buyers never paid the Deposit, because they failed to provide certain documentation to open the necessary bank account in which to place the Deposit. The sellers commenced arbitration proceedings.

Arbitration

At arbitration, the buyers argued that Clause 21 applied so as to preclude them from being in breach of the Contract. In particular, the buyers argued that the sellers had made no efforts to cooperate in finding a solution under Clause 21 despite the buyers’ endeavours. Since the sellers had wrongfully terminated the Contract, the buyers submitted they were relieved of their contractual obligations, including payment of the Deposit.

In response, the sellers argued that the buyers ought to be liable as a result of the Deposit accruing on the buyers’ mere execution of the Contract. The arbitral tribunal was convinced on this point, and held that the buyers could not rely on their own breach of contract to preclude the fulfilment of a condition precedent (i.e. payment of the Deposit). Accordingly, this particular condition precedent was deemed fulfilled, lending the sellers a far more lucrative claim in debt under the Contract than mere damages for the buyers’ breach.

The buyers appealed this issue.

High Court

Since the buyers had never paid the Deposit, they argued that their subsequent obligation to pay the 90% balance never fell due. The sellers were only entitled to claim the Deposit in debt if the buyers had defaulted on the balance.

The High Court viewed this argument with conviction, and further held (as a matter of policy), that promoting a doctrine of ‘deemed fulfilment’ of conditions precedent upon a breach of contract could risk placing a claimant in a better position compared to if the contract had been performed. For example, a claimant would be relieved of any duty to prove and quantify their losses, meaning a defendant would be prevented from legitimately contesting the extent of such losses.

Dias J distilled her conclusions as follows:

• If the buyers had been deemed to have fulfilled the conditions precedent, this would ignore the possibility that the buyers had exercised good faith to try and progress management agreements. This was an “unnecessarily cumbersome” outcome, and would be avoided by dismissing the suggestion of ‘deemed fulfilment’ altogether.
• It was not enough for the sellers to argue that, because the buyers’ performance of the contract would otherwise be rendered futile, ‘deemed fulfilment’ of the conditions precedent should be upheld.

The court also rejected the sellers’ argument at trial that dispensing with a doctrine of ‘deemed fulfilment’ would allow the buyers to rely on their own breach of contract to derive contractual benefits. Plainly, this contradicted the fact that the buyers nevertheless remained in breach of contract and were exposed to a good claim for damages from the sellers.

Conclusion

‘Deemed fulfilment’ has been debated in the courts since the nineteenth century, but Dias J’s timely judgment usefully confirms that the principle is not recognised under English law.

Nonetheless, the judgment is not specific to shipping contracts, and has more general application to a wide range of commercial agreements. Readers on both sides of a contract should take particular note of the need to strictly comply with deposit-related provisions, such as payment timelines, counterparty notices and methods of enforcement.

At Edwin Coe LLP, our Corporate team has a wealth of experience in reviewing and drafting commercial contracts for clients operating in a broad range of sectors. If you require assistance in relation to a commercial contract, including the interpretation and drafting of conditions precedent, please contact a member of the Corporate team.

 

[1] King Crude Carriers SA and others v Ridgebury November LLC and others (2023) EWHC 3220 (Comm).

If you aren’t receiving our legal updates directly to your mailbox, please sign up now